It is no secret that home prices have skyrocketed over recent years. The rise has definitely been outsized in several locations and has skewed that national average to some extent. However, there is a silver lining to the recent rate hikes. With interest rates rising, it likely means that housing prices decrease. However, the amount of mortgage a borrower would qualify for will also decrease.
For many Canadians, the idea of home ownership seems like something of the past. Many are unsure they will ever afford a house. For those that have found themselves in homeownership, a lot are now “house poor” and can’t cover expenses without additional debt. Additionally, a surprising amount of homeowners regret their decision to purchase a house. Furthermore, with interest rates continuing to rise, the cost of ownership only continues to increase as well.
It doesn’t take a visionary to see the cracks and shortcomings in the Canadian housing market. Even in small towns, which should be more isolated from broader market pressures, residents continue to comment about how high housing prices are. The main barrier for prospective home buyers is the ability to come up with a down payment. The Canadian government has tried to address these concerns, and one such way is the Tax-Free First Home Savings Account.
Tax-Free First Home Savings Account
The tax-free first home savings account (FHSA) was announced earlier in 2022 and is supposed to be implemented in 2023. Very little information has been released on it thus far. However, we should get more information later in the year. But for now, we will go off of what we have been given.
The FHSA can be thought of as a hybrid between the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). Sounds confusing but let us explain. Contributions to the FHSA will be tax deductible just like contributions to the RRSP. Even though you get the tax deductibility it doesn’t actually use any of your RRSP contribution room. Contributions are also not based on earned income. Rather, there is a lifetime contribution limit of $40,000 and an annual maximum of $8,000.
Withdrawals from the FHSA will be tax-free just like withdrawals from a TFSA. Once funds are in the FHSA they have to be withdrawn within 15 years and can only be withdrawn once and for the express purpose of buying a home. If they are withdrawn for any other reason, the withdrawal is fully taxable. From our understanding, if the funds aren’t used within 15 years, they can be transferred to the account holders’ RRSP without any barring on their RRSP contribution room. The FHSA seems to take the most advantageous aspects of both the RRSP and TFSA.
The criteria to qualify for the tax-free first home savings account are quite simple and are as follows:
- Be at least 18 years of age.
- Be a Canadian Resident.
- Have not owned a home in the current year or the previous 4 years.
As mentioned earlier we only have a limited amount of information on the Tax-Free First Home Savings Account. As things progress and more information is released, the concerns below may end up being non-issues. However, these concerns are worth mentioning at this time.
The first thing worth mentioning is that there is no age limit to contributions. So you could have people over the age of 71, as long as they still qualify, contributing and getting the tax deductibility of the contributions even if there is no desire to purchase a home. Essentially getting additional RRSP room even though they cannot contribute to RRSPs. This person could then later transfer the proceeds to a RIF to combine with their other retirement savings. I would suspect this loophole will get addressed.
Another thing worth considering is will the FHSA actually help with the unaffordability of housing? Or, will it just drive up demand even more and thus, raise the price of housing accordingly? In cities where housing affordability is the worst, is $40,000 going to make a difference? There already is the RRSP HBP, granted it’s not quite as beneficial, but will this really help the masses accumulate a down payment?
I have no doubt that the intention behind the Tax-Free First Home Savings Account, is good. However, if it will play out as intended is yet to be seen. Will the FHSA help with housing unaffordability? Or will it just create potential tax loopholes that cost the government more to try and unwind?
A potential alternative would have been to just rework the RRSP Home Buyers Plan. This would have made administration easier as the infrastructure is already there, and would have limited uncertainties and potential issues.
They could have also modeled it after the RESP. Rather than being tax deductible and tax-free, which is different than any other savings vehicle, maybe the government could have provided matching grants for contributions.
For now, there is no point in worrying. There is still obviously work that needs to be done and things that need to be hashed out behind the scenes. It will be interesting to see where everything settles when the Tax-Free First Home Savings Account is officially announced.
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